Zedge : Fiscal Q2 2021 Earnings Call Transcript

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Thank you, operator. And thank you all for joining us today.

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Good afternoon. Welcome to Zedge's second quarter fiscal year 2021 earnings conference call. I'm Jonathan Reich, CEO of Zedge and with me is our Chief Financial Officer, Yi Tsai, who will provide additional insight into our financial performance.

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Q2 was another record quarter for Zedge. We surpassed $5 million in revenue for the first time ever, an increase of more than 100% when compared to the year ago quarter, and also reported new highs for operating income, operating margin, net income, EPS, cash flow from operations and EBITDA. Operationally, we completed the long-awaited migration to our new content management system, which is delivering encouraging results earlier than anticipated, and we

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rolled out app icons on iOS. Taken as a whole, we are well positioned for what we hope to be a strong second half of our fiscal year.

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For those of you that are newer to the story, Zedge is a leading app developer focusing on mobile phone personalization and entertainment. Our heritage is rooted in being one of the leading providers of mobile personalization content, focused on offering consumers a rich array of high-quality wallpapers, video wallpapers, ringtones, and notification sounds. Our flagship app, Zedge Wallpapers and Ringtones, is all about personal identity, and acts as a popular hub for self-expression for millions seeking mobile phone personalization, social content and fandom art. To date, the app has surpassed 482 million organic installs and currently has 35 million monthly active users or MAU. The app generates revenue from a combination of advertising, paid

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subscriptions, and our Zedge Premium marketplace, which enables content creators, ranging from world class celebrities to emerging artists, to display and market their digital content and sell it to our users.

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Moving to our second quarter performance, we continued optimizing our ad inventory, benefitting from both MAU growth and seasonal strength in ad pricing. Active subscriptions also performed well with 102,000 net additions and second-year renewal rate of approximately 45%. As you may recall, we earn a higher margin for year two renewals as Google's fee drops by 50%. We need to continue to provide the content and user experience to maintain these strong renewal rates, which we expect will fluctuate over time.

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Turning to product… we completed the rollout of our new content management system in December. This

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milestone opened the door for us to start introducing new features and enhancements that we expect will improve engagement and retention, especially in well-developed markets, including, overhauling user accounts, social and community features, and search and discovery. These will be tested and rolled out iteratively. Currently, we are focused on reimagining user accounts, the foundation needed for many of these initiatives. We expect to complete this redesign in Q3, and shortly thereafter, start introducing community features that will enable users to: follow artists and other users, create and share collections, notify users about new followers and new content, and even offering an easy to remember Zedge handle like zedge.me/jonathanreich. We are also scoping out product enhancements that can be offered to bolster our paid subscription offering in fiscal 2022.

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Our investment in Zedge Premium, our marketplace for artists continues. We are in the process of identifying and hiring a dedicated product manager to lead this important part of our business. This position's responsibility will be to increase the number of professional artists using Zedge as a distribution platform, growing the average revenue per artist, and increasing the use of our marketplace by consumers. In the meantime, we are testing new designs that better display relevant premium content to users, as well as growing our artist base.

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I'm happy to report that the Shortz beta is now available with an ad-supported model, enabling users to consume as much content as they would like simply by watching rewarded ads. Those users seeking an ad-free experience can sign up for a paid subscription. We expect the ad-supported version to increase the customer base

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at the top of the sales funnel and set the stage for increased subscriptions over time. In addition, last week, we rolled out Shortcastz, which are high production value podcasts of our Shortz stories. We're excited by the possibilities that short form audio can bring to the product and will start by analyzing how our users engage with this content.

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On our last call we discussed the $5 million "At The Market" offering, which has now been completed. We expect to initiate a new $10 million program imminently to further fortify our balance sheet in order to provide for maximum flexibility to pursue incremental potential growth opportunities such as acquisitions, for example, to drive incremental growth and unlock shareholder value. We expect to consider potential acquisition targets in, but not limited to mobile gaming, social video, and even mindfulness. Our acquisition strategy is to seekout opportunities where we can leverage our large user base, expertise in monetization, outstanding engineering teams and healthy balance sheet. We are early in this process and do not know what will transpire, but suffice it to say that we are being cautious and selective. We also do not plan on discussing specific potential targets or opportunities until there is something to announce publicly.

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In closing, we had a record first half and expect to report continued strong year over year growth during the second half of the year despite the seasonality in the ad-supported portion of the business. As such, we now believe that top line growth for fiscal 2021 will increase between 75% to 80% when compared to the previous year. In addition, we expect solid growth in EPS and in cash flow from operations.

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Before handing the call over to Yi I want to thank you, our investors, for your support. I also want to remind everyone that our success is a direct outcome of the outstanding team of talented professionals who work at Zedge and who go above and beyond to execute on our vision. Thank you!

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Now, I am going to turn the call over to Yi, who will provide details about our financial performance.

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Thank you!

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Yi

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Thank you, Jonathan!

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I want to start by reminding those on the call that our fiscal year ends July 31st and that our fiscal Q1 and Q2 tend to be seasonally stronger, while Q3 tends to be the seasonal low typically with incremental sequential improvement in Q4. Additionally, we introduced the term "Active Subscriptions" to replace "Paid Subscriptions" as a metric this quarter due to a change in calculation used by Google Play that now includes account hold, which is a subscription status that begins when a user's form of payment fails and the three-day grace period has ended without payment resolution. The account hold period lasts for up to 30 days with the aim to reduce cancellation rate.

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Moving to the second quarter results. Monthly active users, or MAU, defined as the number of unique users that opened our app during the last 30 days of the

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period, increased 3.2% to 35.4 million during January 2021 from 34.3 million in January 2020, and was up 9.3% sequentially. Emerging markets showed strong double-digit growth while well-developed markets continued to contract however at a lower rate than when compared to all four quarters in fiscal 2020. As Jonathan touched on, we are actively taking steps to enhance our offerings for users in well-developed markets to spur both MAU growth and higher growth rates for Zedge Premium.

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Total revenue in the second quarter increased 101% to 5.3 million dollars compared to the year-ago quarter. The main drivers were subscription growth, optimization of our ad waterfall and an increase in advertising rates relating to year-end ad budgets.

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Zedge Premium's Gross Transaction Volume, or GTV - that is the total sales volume transacted through our marketplace - was 211 thousand dollars in Q2, up 7.1% compared to the year ago quarter. As Jonathan indicated, we want to position Zedge Premium as a growth driver in the quarters to come and the introduction of user accounts and additional features will be key to accelerating growth rates.

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Active subscriptions exceeded 700 thousand at the end of the quarter, a 139% increase year over year and 17% on a sequential basis. As you recall, when a new user purchases a subscription or a freemium user converts to a paid subscription, we pay a 30% fee to Google - which shows up in our SG&A as a marketing expense. However, if a subscriber - whether monthly or annual - renews their subscription after 12 months, theGoogle fee drops to 15%. We continued to see annual renewal rates of approximately 45%, which is generally considered to be strong performance within the industry.

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Overall, average revenue per monthly active user or

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ARPMAU was a record 4.9 cents - an increase of 88% year over year and 35% sequentially. The year-over-year improvement is primarily attributable to growth in paid subscriptions and the continued advertising benefits from inventory optimization and adding new distribution partners.

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Our operating margin increased to 47% vs 3% last year and 29% in Q1. These reflect higher subscription revenue and strong cost containment as SG&A only increased 14% versus last year.

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Net income and Diluted EPS were 2.3 million dollars
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and 17 cents, respectively, versus 100 thousand dollars
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and 1 cent in the prior year. Average shares outstanding
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for the second quarter was 13.4 million on a fully diluted
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basis.
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EBITDA was 2.9 million dollars, versus 500 thousand
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dollars last year.
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From a liquidity standpoint, we remain in a strong
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net cash position with almost no debt. As of January 31,
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we had 13.6 million dollars in cash and cash equivalents,
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a 7.4 million-dollar sequential increase and an 11.4-
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million-dollar increase compared to a year ago. The
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increase in cash over Q1 was driven by a combination of
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positive operating cash flow of 2.3 million dollars, and net proceeds of 4.8 million dollars from the ATM we completed during the quarter.

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Moving to guidance for fiscal 2021, as Jonathan mentioned we have increased our top line growth expectations to 75% to 80%. Q3, which has historically been our seasonally slowest quarter, is expected to be a relatively favorable comp due to our business being negatively impacted by Covid-19 last year. Q4 has traditionally been higher than Q3, but also keep in mind that our Q4 comp may be slightly tougher due to the growth trajectory that began in Q420.

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I hope that each of you remain safe and I look forward to speaking with you again on the next call.

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Operator back to you for Q&A.

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